Institutional Determinants of Global Venture Capital (2017-18)

Paul Momtaz, Ph.D. student in finance (entered 2017)

Around the globe, venture capital (VC) is an important financial intermediary, determining the success of entrepreneurial companies and, hence, the success of whole economies. Given the increasing globalization of business, a nation’s competitive advantage depends crucially on an active VC market. It is important to take a global approach to understanding VC activity and firm performance that acknowledges the role of regional idiosyncrasies and studies how to design optimal VC markets.

Momtaz’ research sheds light on the role of formal and informal institutions for the functioning of the global VC market. While the U.S. VC market has dominated the promotion of innovative startups for a long time, recent evidence suggests that venture capitalists are becoming more attracted to opportunities outside the U.S., with an increase in Asia’s VC market by 875 percent in only six years. It is important to understand the drivers behind this tectonic shift, as VC is at the heart of economic growth and crucially determines innovation. Momtaz’ research examines the role of how local rules and cultural factors determine the effectiveness and efficiency of the global VC market. In addition to traditional VC transactions, the research also focuses on initial coin offerings (ICOs) as a special and very disruptive case of global VC. This entailed the study of peer-to-peer VC transactions in which a traditional financial intermediary is absent.

Overall, CGM support made a significant contribution to the progress of the research. CGM funding was used to hire research assistants to gather, check and analyze data and create comprehensive and unique data sets on global VC transactions and ICOs. Because of the size of the database, a web server was set up to perform computations online and source real-time data from various web sources, using web-scraping methods. Some data had to be collected manually, such as accessing the World Bank databases and collecting social capital information on participating individuals, for example, CEOs and key investors from social networks such as LinkedIn and Xing. The next steps will involve further organizing and analyzing the data before proceeding to the main tests, including the setting up of econometric models. The data sets allowed key research questions to be addressed, such as: Why are international venture capitalists losing interest in funding mature U.S. companies, while they are increasingly investing in mature Asian companies? Why is the trend reversed for young companies? The data also enabled Momtaz to write his first empirical paper on the ICO phenomenon. Based on his research, Momtaz has been invited to act as the editor of a special issue on ICOs in The Journal of Alternative Investments. Moreover, the first paper based on the research supported by the CGM is forthcoming in a leading international entrepreneurship journal.

In 2018–19, the CGM is supporting Momtaz with global research under the working title “The Freelance Economy: Where Local Labor Supply Meets Global Labor Demand.”